Fraud Rarely Punished on Small Business Contracts


Fraud Rarely Punished on Small Business Contracts

By Pamela A. MacLean / Redwood Age
December 30, 2010

The government has long had the power to prosecute big companies for fraud for going after lucrative contracts meant for small businesses. But it rarely does.
Workers send blood through pneumatic tubes. (Translogic Photo)

Though hundreds of millions of dollars in government contracts have been diverted to huge corporations without penalty, prosecutions are rare.

A Newswire21 investigation found that despite the complaints of small business owners and the government's own watchdog reports, tens of millions of dollars in contracts annually pad the revenues of big companies, many belonging to Fortune 500 companies.

In 2008, for example, the Government Accountability Office looked at a small sample of Interior Department contracts and found $5.7 million going to firms such as Home Depot, John Deere, Dell and Sherwin Williams.

In March, the GAO found 14 firms received $325 million in sole-source and set-aside contracts [intended for minorities, women and veterans]. The GAO reported, "most were obtained through fraudulent schemes."

A year earlier, the GAO found 19 companies improperly received $30 million in federal contracts intended for small firms in low-income neighborhoods. SBA officials said they were "reengineering" the program to make it more efficient. The GAO concluded the SBA did not have effective fraud-fighting measures.

In a separate $4 billion program intended to help disabled veterans, a 2009 GAO study found at least $100 million going to companies that weren't entitled to it due to fraud and abuse. Yet the Small Business Administration didn't examine whether there was intent to defraud the government.

"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud," the GAO report concluded.

The rules for what constitutes a small business are complex and vary from industry to industry. The size of manufacturers, for example, may be based on number of employees, while retailers have a different standard, according to Joe Swain, a Small Business Administration spokesman. That said, small businesses are often considered those that are privately run and have fewer than 500 employees.

Congress mandated 30 years ago that 23 percent of federal prime contracts go to qualified small businesses, and the SBA tracks how each government agency performs in meeting that goal.

One business owner who has complained about large firms muscling in on small business contracts is Fred Valerino Sr., chairman of Pevco International Systems Inc., a Baltimore firm that makes pneumatic distribution tubes for hospitals and  pharmacies.  

Swiss Owners
Valerino, who has 90 employees, discovered his competitor, Translogic Corp., won 147 federal contracts between 2003 and 2008. It had applied as a small business with 280 employees and $8 million in annual business, although it was a subsidiary of the major Swiss firm, Swisslog Holding AG, with 2,000 employees.

Last year, Valerino complained to the SBA.  "I got back a response that they would turn it over to the Veterans Administration," which awarded the contracts, he said. The VA told Valerino that Translogic's status was "miscoded" and removed the firm from the VA's tally of contracts awarded to small businesses.

The removal of Translogic from the VA tally worsened the agency's small business contract performance, but did nothing to help Valerino. Translogic faced no punishment or loss of existing contracts, despite its lack of qualification as a small business, Valerino said. The SBA dropped the matter.

"SBA only focused on the VA. They didn't reopen the inquiry," said Valerino.  "All the contracts were completed and executed.  I saw no evidence of corrective action, no slap on the wrist."

"We lost millions and millions of dollars in opportunities. There is no justice here," he said.

Swain claims the SBA has become more aggressive in its monitoring under the Obama Administration.  "If we find data that a company is not eligible [for contracts], and intentionally misrepresented themselves we will work with the Inspector General and the Department of Justice," he said.  He declined to comment on the Translogic case.

One Suspension
In recent years, the SBA has suspended only one firm from federal contracts over similar allegations of improperly claiming contracts intended for small businesses. GTSI, a technology systems integrator in Herndon, Va., was suspended Oct. 1. But the SBA didn't move quickly.

GTSI acknowledged in Securities and Exchange Commission documents from 1969 that, "As a result of the acquisition of the BTG Division in Feb. 1998, GTSI no longer qualifies as a small business for contract awards after February 1998."  Yet the company remains among the top 50 governor contractors, with nearly $1.2 billion in federal small business contracts between fiscal years 2004 and 2010, according to the American Small Business League (ASBL).

Less than three weeks after the Oct. 1 suspension the SBA lifted the order after striking a deal with the contractor.  "Now that the SBA has lifted the suspension we are looking forward to getting back to helping our customers meet their mission," the company said in a statement. It declined Newswire21's request for further comment.

"The fact that SBA waited almost 12 years to suspend GTSI after they admitted that they were not a small business, is proof they are assisting these large firms in high-jacking small business contracts," said ASBL founder Lloyd Chapman.

Chapman said his group reviewed the top 100 recipients of federal small business contracts for fiscal year 2009 and found 60 were large firms, which received nearly 65 percent of the total dollars the government said were awarded to small businesses. For example, he said Colt Defense, the large publicly-traded weapons company with 1,000 employees, had 166 federal contracts in 2009 for $122 million, of which $88 million were awarded as "small business" contracts.

See Part 1: Big Muscle in Small Business



Big Firms Muscle In on 'Small Business' Contracts


Big Firms Muscle In on 'Small Business' Contracts

By Pamela A. MacLean / Redwood Age
December 30, 2010

When the Small Business Administration barred a Virginia technology firm from bidding for federal contracts recently, some hoped it signaled a turnaround at an agency that had a well-earned reputation for looking the other way as big corporations muscled-in on work meant for smaller companies.



GTSI Corp., which had signed $1.2 billion in federal contracts between 2004 and 2010, was the first large government contractor suspended since 2008, when IBM was suspended for one week. But less than three weeks after the GTSI suspension, the SBA struck a deal with the firm and lifted the order. 

The GTSI case reflects a broader problem confronting the nation's struggling small businesses. Large corporations routinely reap billions of dollars from federal contracts intended to help mom-and-pop firms. In the last decade, a dozen federal investigations and Congressional inquiries have turned up billions of dollars annually that go to big corporations despite legal mandates that small businesses win a share of federal contract dollars.

"By failing to hold firms accountable, SBA and contracting agencies have sent a message to the contracting community that there is no punishment or consequences for committing fraud," according to one Government Accountability Office report  reviewed by Newswire21.

At the time the suspension, GTSI said the suspension was lifted after the firm agreed to "bring in an SBA-approved monitor to report to the SBA on GTSI's compliance with the agreement."  In another part of the deal, GTSI's chief executive officer and corporate attorney resigned.  "GTSI will continue to cooperate with the continuing investigations of its conduct as a subcontractor for certain small businesses," the company said in a statement. Paul Liberty, company spokesman, declined to elaborate on how the problems began or on the solution worked out with the agency.

The SBA claims it is attempting to address the concerns. "The problems were not created overnight and we have taken steps to address them," said Joe Swain, SBA spokesman in Washington. He pointed to the Small Business Dashboard launched September 15 that can help track mistakes in contract awards.  When discrepancies are found by contracting companies, Swain said, the SBA issues annual "anomaly" reports. 

"We are not afraid of the transparency on this," he said, adding that the SBA has been "much more aggressive" since President Obama took office.

But the more expansive website long used by contractors is the Federal Procurement Database. According to allegations in a federal lawsuit filed by the American Small Business League, the agency has proposed removing a key requirement from the FPD so that companies would no longer be required to swear under oath that they qualify as small businesses.

Specifically, the small business advocacy group claims the SBA moved in March to eliminate the one spot in the long-standing FPD that companies must designate, under penalty of perjury that they are a small business.  Swain claims there are other places in the contracting process that require firms to make sworn statements in order to prevent fraud.

While there may be other places in the labyrinthine government filing process that requires such certification, the Federal Procurement Database is the place where the public and watchdog groups can monitor the accuracy of corporate contractors and the SBA's oversight efforts.

Public Portal

The two sides have been in settlement talks for months without resolution.

"There is no reason they [SBA] should keep destroying evidence that could be used to prosecute these firms for fraud," ASBL founder Lloyd Chapman said in an interview.


Chapman (ASBL Photo)

Chapman asked a US District Judge William Alsup to block the changes. In March, the judge let Chapman question SBA employees about the reason for proposal. 

Alsup speculated in court that there may well be large firms "on K Street in Washington," a reference to the address of many lobbying firms, that pressured the government to eliminate the document trail Chapman wants to preserve.

"I think the judge was right," said Chapman, who claims the SBA wants to eliminate the very coding  "we need to sue [companies] for fraud."

The 23% Target
Thirty years ago Congress mandated that 23 percent of its prime contract dollars go to small business. But the goal has also created a perverse incentive for the SBA and other federal agencies to ignore large corporations that claim small business status because big awards allow the agencies to get closer to meeting the target.

When small company status is attributed to a large corporation in a contract, the SBA's traditional response to the problem has been to retroactively reduce the count toward the 23 percent tally - but not to redirect the contract to a true small business. This deprives small businesses of  winning their fare share of government business, according to Chapman.

The SBA recently reported that small businesses won nearly $97 billion in federal prime contracts last year, just shy of the 23 percent goal. But ASBL claims that figure is inflated by dollars that have wrongly gone to big corporations claiming small business status.  

"My guess is that legitimate small businesses are getting less than $50 billion a year, just a few percent of the goal," said Chapman.

ASBL's review of the top 100 recipients of federal small business contracts for fiscal year 2009 showed 61 were actually large businesses, many are household names like Lockheed Martin, Boeing, Raytheon, British Aerospace and Bechtel Corp. 

Undetected Errors
As recently as March, the GAO reported that its own investigation of 14 cases, found $325 million in contracts went to firms whose presidents lied about income, ethnicity or underreported assets to the SBA. Yet in some cases the SBA did not detect the falsehoods and certified the firms as small businesses, according to the GAO.

To be sure, some of the designations of small business status stem from outdated information, such as when a large company buys a small one, or when a small business outgrows the designation.  But other cases appear to be intentional.  As many as 60 of the top 100 small business contract recipients were large firms, some even in the Fortune 500, according to the ASBL, which currently has six suits pending in federal court in San Francisco.

Although an interagency task force on federal contracting opportunities for small business issued 13 recommendations to improve transparency in deals with small businesses, the loss of contracts to big business competitors is unlikely to turn around soon.

Now the SBA faces a merger issue of its own. On November 11, the President's special commission on debt reduction included a plan to eliminate the SBA by merging its operations into the Department of Commerce for an estimated $1 billion savings over the next three years.

Next in Part 2:  One small company's challenge


In the SBA's Face


In the SBA's Face

By Richard Larsen
Hispanic Business Journal
December 16, 2010

The spoils are hug--$230 billion in Small Business Administration funds that could be going to small businesses not as loans, but as contracts for goods and services. Yet, large corporations have eaten up 80 percent of the money supposedly earmarked for small businesses the ASBL says.

A bit confused? Scratching your head and wondering how that can be?

Former Sen. Sam Nunn of Georgia once quipped, "The definition of a small business is a business that couldn't afford a lobbyist." That's exactly what Lloyd Chapman found out more than 20 years ago when he came to California after a stint in the Texas Controller's office. He went into the computer industry, but quickly noticed problems in the contracting program for small businesses.

By law, 23 percent of government contracting must go to small businesses. What Mr. Chapman learned as he looked into the problems astounded him. He decided to do something about it and formed the American Small Business League with the goal of stopping the diversion of funds from small businesses--becoming, in effect, a lobbyist for the interests of small business.

Large and Small at the Same Time

The ASBL, based in Petaluma, Calif., takes credit for instigating the first federal investigation into the diversion of money from small businesses. The General Accounting Office (now known as the Government Accountability Office) found in 2003 that government regulations and inaccurate information in databases were the culprits.

Testifying before Congress in May 2003, David E. Cooper, GAO director of acquisitions and sourcing management, told the House Committee on Small Business that the GAO had identified 49,366 firms receiving contracts as small businesses in fiscal year 2001. More than 5,300 of these firms also had received contracts as a large business. The GAO's tally--those 5,300-plus companies received $13.8 billion in contracts as small businesses and almost $60.6 billion in contracts as large businesses.

How can a company be both large and small at the same time?

"The law says that when a large business buys a small business, the small business can keep its status as a small business," Mr. Chapman said during a phone interview.

For example, Company A, with 20,000 employees and $8 billion a year in revenues, purchases Company B, with 15 employees and several hundred thousand dollars in revenues. Because of federal regulations, Mr. Chapman said, Company B can keep its small business status for up to 20 years.

"That means the government could buy a plane through the small business and be seen to be using a small business," Mr. Chapman said, even if the big company benefits the most.

Problem Seen, Not Fixed

Since the 2003 GAO report, there have more than 30 federal investigations that, the ASBL says, "have found billions of dollars in fraud, abuse, loopholes and a lack of oversight in federal small-business contracting programs."

Yet, the problem persists. An ASBL data analysis of small-business contracting in 2008 found that the top 10 firms received contracts worth $3.8 billion. Of those 10, eight were large firms and received $3.3 billion. In addition, 60 of the top 100 contracts went to large firms, which received $9.7 billion out of $15.1 billion in contracts.

With agencies such as the GAO, the Department of Interior's Inspector General and even the SBA's Inspector General finding fault, why aren't problems getting fixed?

"Washington runs on money and K Street lobbyists," Mr. Chapman said. "In addition, the Pentagon and the aerospace industry have the motivation and the money to stop legislation aimed at helping small business."

One such piece of legislation is House Resolution 2568, drafted by the ASBL and introduced into the House on May 21, 2009, by Rep. Hank Johnson, D-Ga. Called the Fairness and Transparency in Contracting Act of 2009, HR2568 would have refined the definition of small business in the Small Business Act as "independently owned."

Th e bill had 26 co-sponsors. It was referred to House Oversight and Government Reform committee, and to the Subcommittee on Contracting and Technology of the House Small Business Committee. No other action was taken on the bill.

Mr. Chapman said the bill would be reintroduced. A check of the midterm election results showed that Rep. Johnson was re-elected, so Mr. Chapman will not have to seek a new sponsor.

Making Headway

Making sure the federal government meets its obligation to spend 23 percent of its contracting with small businesses requires tenacity, commitment and outspokenness--all of which Mr. Chapman has in abundance.

"I have done more to lobby for small business than every group in the nation combined," Mr. Chapman said.

He and the ASBL list accomplishments as getting 600 large businesses removed from the SBA's database of small businesses; reduced SBA's value-added reseller size standard from 500 to 150 for information technology firms; and prompted 25 investigations on large
companies getting small-business contracts.

In addition, he and the ASBL have filed seven lawsuits against the SBA, six of which they won. The seventh lawsuit had the ASBL seeking the phone records of SBA Press Officer Chief Mike Stamler. The 9th Circuit Court of Appeals ruled against the ASBL. Mr. Chapman said he and the ABSL would ask the 9th Circuit Court to reconsider its ruling. The ABSL is represented by Robert E. Belshaw of Gutierrez & Associates in San Francisco.

Looking Forward

Much work remains to be done, Mr. Chapman said. He wants the ASBL to force the SBA and the Justice Department to rigorously investigate fraud and misrepresentation in small-business contracting. Current law that calls for those guilty of fraud to be fined $500,000 and barred from federal contracts needs to be enforced. And, he and the ASBL will seek to eliminate the loophole that allows a large corporation to buy a small business and use the small-business status to gain federal contracts.

The ASBL reaches about 100,000 businesses through a network of 5,000 local chambers of commerce. ASBL operates on a combination of dues and donations. The lawsuits filed are always done with the stipulation that, if the ASBL wins, the losing side pays the legal bills.

If the ASBL succeeds and small businesses finally get their fair share of SBA contracts, how would Mr. Chapman feel?

"I would be thrilled," he said. "That would be the largest stimulus ever."


OD blacklist authority could go too far, say small-biz advocates


OD blacklist authority could go too far, say small-biz advocates

By Brian Robinson
Washington Technology
December 14, 2010

Business advocates are charging the Defense Department with redlining the government contracting business to the extent that the 2011 Defense Authorization bill would allow DOD officials to secretly blacklist contractors and bar them from doing any business with the federal government.

In particular, they say this “blatant power grab” by agency heads could end up significantly harming small-business contracting because it could lead to the concentration of contracting dollars in the hands of just a small number of big companies.

The American Small Business League (ASBL) recently went public with its concerns in a dispatch from Communications Director Chris Gunn in The Exception magazine.

“Small-business advocates are concerned that DOD’s determination will be shared with each agency where the company competes as a prime contractor or subcontractor,” Gunn writes. “This could lead to the broad-based exclusion of contractors from federal contracting programs without due process.”

That could be a sensitive issue with the new Congress. Government agencies have specific small-business set-aside targets, but small-business advocates consistently complain that agencies are not doing enough to meet those goals. And last year, things came to a head in Congress over charges of fraud in the Small Business Administration’s set-aside programs, which allegedly cost small companies some $100 million worth of business.

According to Gunn, ASBL estimates that more than $100 billion in federal small-business contracts are diverted away from such companies every year, with many large companies — such as Boeing, Lockheed Martin and Northrop Grumman — receiving the contracts instead.

ASBL has legs when it comes to making its concerns known and paid attention to. Earlier in the year, it sued the government for muddling its small-business contracting data, thereby reducing the transparency of government contracting. Groups had used that data to uncover fraud in the past, ASBL said.

And in November, the group sued the Homeland Security Department for refusing to release subcontracting reports on contracts it had awarded to Boeing.

A big part of the beef ASBL and others have with the new Defense bill is that they say it will allow DOD to blacklist companies without notifying those companies. And it protects the blacklist from disclosure requirements that would be part of a Freedom of Information Act request, a protest to the Government Accountability Office or action in federal court.


Elimination of Loopholes for Pentagon Contractors Could Create Thousands of Jobs

Press Release

Elimination of Loopholes for Pentagon Contractors Could Create Thousands of Jobs

December 13, 2010

Petaluma, Calif. – The elimination of a potentially fraudulent Pentagon subcontracting program could help spur job creation by increasing the amount of federal subcontracting dollars available for middle class firms.

The Comprehensive Subcontracting Plan Test Program (CSPTP) was established over 20 years ago with the stated mission of increasing subcontracts for small businesses. The American Small Business League (ASBL) has long maintained that the program actually allows large defense contractors to circumvent small business subcontracting goals.  As established, the program eliminates subcontracting reports available to the public, the media, and Congress, as well as eliminating all penalties for non-compliance with subcontracting goals.

The ASBL estimates that elimination of the CSPTP would redirect approximately $10 billion a year in additional subcontracting opportunities for middle class firms. Research conducted by the ASBL has shown that over the past 21 years, small businesses have been defrauded of more than $200 billion in federal subcontracts due to the CSPTP.

When first coming into office, President Obama estimated that every billion dollars spent on federal infrastructure projects would create 40,000 jobs. Based on these estimates, ending the CSPTP would create roughly 400,000 new jobs. ( According to the U.S. Census Bureau, small businesses are responsible for more than 90 percent of all net new jobs, 50.2 percent of the non-farm private sector workforce, 50 percent of the gross domestic product (GDP) and 90 percent of exports and innovations. (  

In October, five members of the House of Representatives, lead by Congresswoman Yvette Clarke (D-NY) requested the U.S. Government Accountability Office (U.S. GAO) to investigate and evaluate the CSPTP to determine if the program was meeting its stated goals. After being in place for over two decades, the CSPTP has never been evaluated by the Pentagon or any federal agency. (

“This program has done the antithesis of what Congress said it would. It needs to be eliminated and investigated to determine how much fraud has occurred over the past 21 years,” ASBL President Lloyd Chapman said. “If President Obama and Congress were serious about job creation, they would end programs like the Comprehensive Subcontracting Plan Test Program and ensure that federal contracts meant for small businesses actually go to middle class firms who create over 90 percent of all new jobs.”